During the 1990s, liquidity was relatively abundant in the European Union and the European central banks mostly developed a relaxed monetary policy. While the bank lending channel view of the monetary policy would have suggested an increase in loans to firms in this context, the demand for bank corporate lending, however, slowed down, suggesting that monetary policy was not effective in this area. This article analyses how the financing behaviour of Spanish firms during 1992–2003 is related to their liquidity holdings and how this relationship may affect the effectiveness of the bank lending channel. The empirical evidence provided suggests that firms holding high liquid assets may replace bank lending by other sources of financing. Hence, higher liquidity holdings allow firms to invest in attractive investment projects in the event of a tightening of monetary conditions.